Where should you Invest - Flexicap Fund or Nifty 500 Index Fund? | Flexicap vs Nifty 500 | ETMONEY

With over 1,70,000 crores of assets under management, the flexicap category is the 2nd largest amongst equity mutual funds. Now, what makes flexicap funds so attractive to investors is the fact that fund managers can invest money across different companies and different sectors without any restriction

Now, with this debate brewing on whether one should invest in actively managed funds or index funds an offshoot discussion seems to be prepping around flexicap investing and investing in a Nifty 500 fund

And so in this video, we shall take a closer look at the flexi cap category and we continue to draw comparisons with the NIFTY 500 on many parameters like the capitalization structure, investment style, sector preferences and of course the performance metrics.

Topics Covered:
00:00 Introduction
02:58 Capitalization structure
03:50 Investment style
04:09 Sector preferences
05:37 Inclusion of foreign stocks
08:37 Performance metrics
11:51 ETMONEY Opinion


The mutual fund universe the large caps, mid caps, multi caps are all defined by the size or capitalization of the holdings within a scheme.

In that regards flexicaps, although it does have the word cap in it is not defined its rigidity but it is actually characterized by its luxury of being able to bob and weave across different market capitalizations. This flexibility ideally allows them to adapt faster to changing business cycles, take advantage of sector rotations, manage market volatility and minimize downside risks.

In other words, the investor is counting on the fund manager not simply following the NIFTY 500 but using his or her flexibility to its maximum and chartering one’s path

And there are many ways of verifying this

Examine the number of holdings i.e. the number of companies that the fund has.
Because if this number is high, say 50 companies or even more then it shows a lower level of conviction and a tendency to play it safe around the NIFTY 500 benchmark returns
But if the number is too low, then there might be a tad more risk there .. as some bets may not turn out the way it was expected
The predominant market capitalization of a fund’s holdings
The sector representation in these schemes


INCLUSION OF FOREIGN STOCKS

Reasn why the Flexicap funds include International stocks:
1. To look beyond the borders is to expand the set of quality companies
2. Returns
PERFORMANCE COMPARISONS
Since most of today’s flexicaps were yesterday’s multicaps the true comparison of flexicap funds is often done with large-cap funds and funds in the large & mid-cap category. From a performance perspective, there is not too much to choose from between these categories but if you want to be precise, then it’s the large & mid cap category that seems to have delivered slightly higher returns than the others over these last 5-5.5 years.

In our opinion, this somewhere seems to connect with our earlier observation that flexicap funds are generally skewed in favor of large capswhile funds in the large & mid cap category have to compulsorily have at least 35% of their assets in mid caps at all times

The data shows that the NIFTY 500 TRI performance is very close to the median performance of flexicap funds. This effectively means that there is a 1:1 selection risk .. which is another way of saying that if you choose & invest in two flexicap funds, it is very likely that one of the funds might underperform the benchmark

In fact, to this point we went ahead and even mapped the performance of 20 flexicap funds across multiple years to see if there is some consistency or pattern that’s worth studying. While none of the schemes had beaten the benchmark in all 6 years there are some schemes that had given an alpha over the NIFTY 500 in four or even five years.

ETMONEY OPINION

So what did we understand here?
For one we know that all flexicap funds are not similar by a fair magnitude and we saw that in terms of the number of stocks they hold, their capitalization type, and the sectoral distribution. We also drew a comparison on the inclusion of foreign stocks which is a likely to move from being a trend to being a norm in flexicap funds within a year or two.
And finally we learned from a returns standpoint, that half of the flexicap funds were outperforming the NIFTY 500 index while half of the funds were underperforming it. The top quartile of flexicap funds that’s the top 25% of funds by returns .. have almost always ended up delivering an alpha of 5 to 8% over the NIFTY 500

#Mutualfunds #Flexicap #Nifty500


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